Business Model 101: Monetizing Communities and Marketplaces

While monetizing a business network, community or marketplace, a successful company would be one which knows what the central proposition of the product is and would know how to monetize that particular proposition. It doesn’t take a genius to figure out that the central proposition for a marketplace is the transaction happening between two parties on it.

Borrowing a parallel from computer science and graph theory, the assets in a network or community may be understood in the following way:

  1. Users (graph nodes): N in number
  2. Interactions (graph arcs): Potentially, as high as Factorial N in number. For the mathematically nitpicky, this would be approximately NCx (N Combination x) where x is the average number of interactions per user
  3. Transactions (weighted graph arcs): Potentially as high as Factorial N times the volume of interactions between any two parties on an average.

Clearly, the value diminishes as we move from monetizing transactions to monetizing users. The further you go away from the central proposition, the lower the likelihood to tap the real value of the marketplace.

Revenue models in order of how close or far they are from the central theme of the site would be:

  1. Transaction-based revenue models: Directly monetizes the transaction. The best ones even monetize the volume of the transaction. E.g. ODesk, which monetizes volume of the transaction by billing by the hour for service provided Cyworld: A social network where SOHOs set up shop and sell to customers, a cut of which goes to the network
  2. Lead generation-based model: Monetizes the interaction but fails to create value out of the life-time value in the transaction. E.g Justdial on voice. Yes, it does connect the SMB  to the customer but potentially loses out on the ability to continue monetizing it on an ongoing basis.
  3. Value-added service model: Monetizes off the interaction, but not off the transaction. Monetizes secondary services that may be offered to the community while actual transactions are free thereby encouraging people to transact more and hence use the VAS more often.E.g. One of the many monetizing models on Alibaba
  4. Subscription model:  Monetize one-time or once a year on a float subscription irrespective of number of transactions. This only monetizes the users in the community offering them special privileges but fails to monetize all the activity.E.g. Indiamart
  5. Advertising model: In my opinion, a very poorly thought out business. Anyone owning transactions and interactions and monetizing only the users (or the nodes) would be wasting his asset. You might as well get this done as a media company.
  Transactions Interactions Users
High value per ticket Transaction-based revenue model Lead-generation based model Subscription model
Low value per ticket   VAS model Advertising model

So why in the world do people not want to monetize transactions. Some of the major reasons we get to hear from time to time are:

  • Tracking and monetizing interactions and transactions is more complex to implement technologically than tracking and monetizing users
  • Monetizing transactions on an ongoing basis sometimes ends up restricting the users in how they interact on the network. E.g.to monetize transactions, the marketplace may make free interaction more inconvenient than paid interaction to prompt users to pay. More often than not, this is antithetical to the free world of the internet and fails miserably
  • Monetizing transactions and interactions usually require multiple payments collection touchpoints with the user. If payment collection from the end-user isn’t online and mobile and involves significant costs, a onetime subscription collection seems better.
  • The end user in a few cases is not evolved enough to understand anything beyond the one-time subscription service
  • More often than not, the business owner ends up monetizing through advertising because he didn’t think it out well enough. “Get the community and the users will monetize themselves” doesn’t work unless you are a Yahoo!

If it’s the last problem that your company faces, you’re in for a tough time. Any site in the world can sell eyeballs. The power of the community is not in the number of people you have but on the number of connections the community can potentially generate. Monetizing that is the big deal.

 

(The author, when not going trippy with other guitarists or reading random literature, handles Corporate Development and New Venture Funding at Intuit and is rather intolerant of poorly-cooked chicken, well-cooked spinach, too little focus on business model and too much focus on powerpoint)
Author: Sangeet Paul Choudary